Nevertheless, we note that 2Q16 results were adversely impacted by extraordinary low win percentage rate in the VIP segment and non-recurring cost initiatives (mainly due to headcount rationalisation).

The luck-normalised revenue and adjusted EBITDA would have been much better at S$553m and S$192m respectively.

VIP: Hit by lower win rate and weaker volume.

Similar to rival MBS, GENS’ VIP rolling chip volume (RCV) took a hit and dropped 23% qoq (-39% yoy) but we estimate the qoq drop quantum was smaller than MBS’ 32%.

We estimate GENS’ RCV at a new low of S$6.9b in 2Q16. The VIP segment was further dampened by a poor win rate of merely 1.7%, the first time in RWS’ history of a win rate below 2%.

GENS’ RCV market share improved 3ppt qoq to 43%.

Mass market: Softer GGR.

GENS’ 2Q16 mass-market GGR was estimated to have weakened 13-14% qoq and yoy, implying GENS did not meaningfully take market share from MBS although the overall mass market has softened. GENS’ GGR market share for the mass segment was relatively stable at around 39% while the non-rolling chip drop volume market share was 42%.

We are surprised by the mass-market GGR drop, given the respectable growth in tourists’ arrivals in April-May.

One-off impact from cost rationalisation initiatives.

The sluggish 2Q16 earnings were partly affected by non-recurring cost (no amount specified), mainly from the headcount rationalisation exercise during the quarter.

Management expect savings of S$30m on an annualised basis but the full impact can only be seen in 2017. Management expects non- recurring expense to be incurred for this cost rationalisation programme in 3Q16 as well.

STOCK IMPACT

Meaningful drop in provisions and expected to be lower in 4Q16.

Provisions dropped by S$39m qoq and S$3m yoy to S$54m in 2Q16. Management guided that the old receivables prior to 2015 have either been written off or collected, and outstanding receivables are credit extension in the past 18 months. Management expects 3Q16’s provision to be around current levels.

We believe impairment charges could normalise to around S$30m thereafter (impairment is a high-single-digit percentage of receivables) as GENS’ receivables have came down to a more manageable level in 2Q16.

Cautious on the VIP segment in the near future.

Management is cautious on the near- term outlook for the VIP segment, given the softness in the high-end segment, which is a global phenomenon. However, the company believes current gaming volumes are sustainable despite the lack of growth catalysts.

Improving tourist arrivals did not help in the mass market.

Singapore’s higher tourist arrival yoy growth of 15% in April and 10% in May did not seem to have helped mass- market gaming volume. Management explained that the tourist arrival growth came mainly from the lower-end segment which is not the casino’s target customers. Management expects the mass market to remain steady and believes it could see some growth in customers from Indonesia, Thailand and selected China cities.

Cleaner slate in 2H16.

We expect a cleaner slate in 2H16, given lower provisions as well as the additional severance costs should be offset by part of the S$30m annual cost savings.

Jeju project update.

For the Jeju JV project’s residential properties, 151 units were sold in the first launch, representing a 50% take-up rate. The second launch is expected in October.

Management said the progress of the project is on schedule and slated for progressive opening from end-17. Separately, we note the property could only have sales recognition upon completion.

EARNINGS REVISION

We cut our EBITDA forecasts by 25%, 13% and 14% for 2016-18 respectively, largely due to downward revision on the win rate (for 2016) and lower assumptions for both VIP and mass market gaming volumes.

VALUATION/RECOMMENDATION

Maintain BUY with a lower target price of S$0.88, or 2017F EV/EBITDA of 10x.

We expect share price to react negatively to the weak results.

The key re-rating catalyst is our expected recovery in 2H16 earnings to an annualised run rate of S$850m.

It is worth re- highlighting that underpinning the earnings recovery are:

expectations for 2Q16 gaming volumes to be sustained,

lower provisions for receivables,

cost savings, and

luck normalisation.

Hence, our new target price of S$0.88 (previously S$0.97) takes into account investors will value GENS based on prospective normalised run rate of S$850m once earnings start to recover in 2H16.

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